Would make sense for Portugal to seek aid: Nowotny

By IBT Staff Reporter On 03/27/11 AT 10:48 AM

It would make sense for Portugal to seek aid from the European Union bailout fund, although such a decision will be caught up in domestic politics, European Central Bank Governing Board member Ewald Nowotny said.

Portugal's Premier Jose Socrates submitted his resignation last week after parliament rejected austerity measures proposed by his minority Socialist government to try to avert a bailout.

Today we see that unfortunately the domestic political situation in Portugal has clearly worsened, Nowotny told Austrian broadcaster ORF on Sunday.

The head of the government has stepped down. Portugal certainly has a problem in terms of competitiveness, he said, noting Lisbon needs to refinance billions of euros of debt.

From a purely economic point of view one could probably recommend it, he said, when asked if Portugal should seek an EU bailout. But as you know economic policy is also politics and in Portugal it's very much about domestic politics.

Portugal is widely expected to be the next euro zone domino to fall after Ireland and Greece, but a decision on what it might do may take weeks, if not months, because of the upheaval.

ORF said Eurogroup Chairman Jean-Claude Juncker had estimated Portugal could need up to 75 billion euros in aid. Asked whether he agreed, Nowotny said he could not give an estimate but that this was no completely unrealistic sum.

HEADING BACK TO NORMAL

On Greece, Nowotny said there were a range of risks to its recovery which were being reflected in the markets.

If we were to have better overall economic growth in Europe then I believe that Greece has a good chance to come out of this on its own, he said, adding that domestic politics and developments in the world economy could put this at risk.

Asked if Greece might have to restructure its debt, Nowotny said: We believe that Greece will be able to manage but we know, as experienced economists, there is always a risk.

The ECB is examining Japan's crisis and the Middle East unrest for potential effects on the euro zone although it will probably stick to its overall goal to bring rates within a normal range and continue to withdraw liquidity measures brought it to fight the financial crisis, he said.

My personal opinion is that ... nothing will change in terms of our original outlook -- that we want to go in the direction of normalization, he said.

He said events in the Middle East were more relevant to the euro area than Japan because of their influence on the oil price and that very high energy prices were on the ECB radar.

What is important for us is that no second-round effects come, he said. We are watching this development extremely closely.